⛵Dhow Dispatch │ How SPVs Actually Work (And Where Investors Get It Wrong)

Special Purpose Vehicles began as a legal engineering solution rather than a product. At its core, an SPV is a standalone legal entity (most often a Limited Liability Company (LLC) or a Limited Partnership (LP)) created solely to hold one specific investment.

In startup investing, the result is straightforward: instead of having a dozen or more individual investors on a company’s cap table, a single SPV entity holds the position for all participants. That reduces legal complexity for founders and lets investors co-invest without adding noise to ownership records.

This structure isolates risk to that one investment. If the SPV’s company does poorly, the downside is contained within the vehicle. That legal separation is part of why SPVs have become so widely adopted.

This division of roles matters because each group has different incentives and obligations.

Step 1: Formation - The sponsor creates the SPV (often an LLC) and circulates a subscription agreement and a governing agreement to prospective investors

Step 2: Fundraising - Investors contribute capital. Minimum investments in syndicate SPVs often range from $1,000 to $5,000 or more depending on deal size and lead strategy

Step 3: Investment - Once capital is collected, the SPV writes a single check into the target company. The company records the SPV as the investor on its cap table

Step 4: Hold Period - Unlike public markets, private investments usually take years before a liquidity event happens. Whether through acquisition, secondary transaction, or IPO, the timing is uncertain and can be long

Step 5: Liquidation - When liquidity happens, proceeds flow to the SPV, which then distributes to investors based on ownership, after fees and carry

A common misunderstanding among new investors is that SPVs accelerate liquidity compared to funds. They do not.

Unlike public stocks or liquid ETFs, private company exits typically occur over multi-year horizons. Even in strong market cycles, exits often take 5–10 years or more from initial investment to meaningful liquidity.

It’s true that an SPV’s timeline in theory could be shorter than a traditional VC fund (which often assumes a 10+ year life). But in reality, the SPV’s life is entirely tied to the underlying company’s exit timing. If that company delays an IPO or if secondaries are limited, the SPV simply stays in place until liquidity happens.

This is why treating SPVs like liquid assets can lead to frustration. They are legal tools for ownership, not products for quick turnaround.

One of the reasons SPVs became appealing is lower economic drag.

Traditional venture capital funds typically charge a 2% annual management fee and 20% carried interest. SPVs often avoid ongoing management fees, and sponsor compensation usually comes through carry alone, more closely aligned with outcomes.

That being said, the details are highly important:

Some SPVs still charge setup or admin fees to cover legal and compliance costs.

Carry for SPVs typically sits in the mid-teens or higher depending on complexity and sponsor role.

These economics make sense when you view SPVs as deal-specific vehicles, not diversified funds.

Understanding fee structure is central to return expectations and should never be an afterthought.

Misconception #1: SPVs are liquid - They are not. Your capital is committed to the underlying company’s long-term timeline, which can remain locked up for years.

Misconception #2: SPVs automatically diversify risk - They do not. Each SPV is one company. If that company fails, the SPV’s value goes to zero.

Mistake #1: Ignoring legal docs - The subscription agreement, operating agreement, and other governing documents determine rights, distributions, and reporting. They are not boilerplate and matter deeply.

Mistake #2: Assuming access equals advantage - SPVs can democratize access, but access without context or governance does not reduce risk.

SPVs today are no longer fringe vehicles. They serve as infrastructure for many private allocations and have reshaped how deals are done, especially outside big institutional funds.

Platforms like AngelList and Carta have made forming and administering SPVs more efficient and cost-effective than it was a decade ago.

That said, SPVs remain tools, not solutions. They provide access and structure but carry inherent limitations that investors must understand before allocating capital.

SPVs are simple in design but nuanced in consequence.

They provide a way for investors to co-invest in private companies without complicating cap tables or joining long-cycle blind funds. But they do not make private markets liquid or easy to time. Your capital still faces long horizons, concentrated risk, and structural economics tied to how private investing works.

What investors really pay for is patience, governance discipline, and structural clarity. Those factors matter far more than the simple access SPVs provide. Understanding how SPVs work, and where they tend to break down, is a foundational skill for anyone serious about participating in private markets.

If this was useful, we can publish a step-by-step SPV due-diligence checklist next. It will reflect how we actually think about these deals sequentially: putting structure first, followed by economics second, and narrative last. Please reply with “SPV Guide” if interested.

At Dhow, we focus on turning private investing from something opaque into something people can actually understand and use. SPVs, when done right, are a clean way to concentrate capital, align incentives, and back founders building real businesses. With fewer layers, clear economics and one vehicle per thesis, they provide opportunities for skewed risk/reward investing. As more capital moves into private markets, structures that reduce friction and confusion will win. That’s precisely how trust compounds and long-term ownership gets built. If this helped clarify how SPVs really work, share it with a friend (or two).

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